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chief financial officer’s reportBlue Label Telecoms’ (BLT) maiden financial period as a listed company embodied a multitude of corporate transactions which need to be explained to provide shareholders with meaningful insight into both the resultant structure of the group and its performance. In order of progression, the following events transpired: Restructuring Prior to the group’s listing on the JSE Limited in November 2007, the companies incorporated in the listing were previously subsidiaries and associates of Blue Label Investments (Proprietary) Limited (BLI), The Prepaid Company (Proprietary) Limited and House of Business Solutions (Proprietary) Limited. The group acquired these assets from the shareholders of BLI in return for the issue of 314 623 074 BLT shares at R5,50 per share. A further 63 474 919 BLT shares were issued to these shareholders for the purchase of their loan claims in BLI of R349 million. The restructuring also embodied the acquisition of minority interests in the following companies:
Minority interests remaining are:
The restructuring was the first step in a programme to create the listed vehicle, in line with the group’s strategy to control the cash flows and operations of these companies, and in turn to achieve significant vertical integration. *This was purchased prior to year-end Microsoft Corporation collaboration In November 2007 Microsoft Corporation acquired 12% of the equity in BLT for R620 million, of which R239 million was represented by a fresh issue of shares at the listing price of R6,75. Listing on the JSE Limited Blue Label Telecoms was listed on the Main Board of the JSE Limited on 14 November 2007, through the placement of 183 585 830 shares at R6,75 per share and 14 545 455 shares at R5,50 per share. This resulted in the successful raising of capital of R1,32 billion. The funds raised were allocated as follows:
Performance against the forecasts presented in the pre-listing statement The PLS included the group’s unaudited forecasts of basic and headline earnings of R144 million, core earnings of R234 million, pro forma earnings of R250 million and core pro forma earnings of R340 million. The group exceeded these forecasts in all four of these earnings categories. The forecast earnings for the year ending 31 May 2008 were exceeded by 25,50% on the achievement of actual earnings of R181 million. These results were achieved after accounting for expending once off extraneous costs, amortisation of intangible assets in terms of IFRS 3: Business Combinations requirements, allocation to minorities of their share of profits up until listing date and the benefits of finance income generated from the net proceeds of cash received on listing from the date that such funds were received. The forecast core earnings were exceeded by 15,38% on the achievement of earnings of R270 million. The core earnings are calculated after adding back the once off extraneous costs and the amortisation of intangibles. The forecast pro forma earnings were exceeded by 8% on the achievement of earnings of R269 million. The pro forma financial results have been prepared to illustrate the impact of the group’s financial results as if the listing, restructuring and acquisition of minorities occurred on 1 June 2007. The forecast core pro forma earnings were exceeded by 9% on the achievement of earnings of R371 million. The core pro forma earnings are calculated after adding back extraneous costs and amortisation of intangibles to the pro forma earnings. The core pro forma earnings represent the achievement of the company that currently makes up the group and the cash reserves that the group holds. These earnings therefore represent the effective financial performance of the group and represent the base on which management will compare growth in the year to come. Financial results Basis of preparation The group’s financial statements have been prepared
in accordance with and in compliance of the
international financial reporting standards (IFRS), the
listings requirements of the JSE and the South frican The consolidated financial statements have been prepared in accordance with the going concern principle under the historical cost basis as modified by the revaluation of certain assets and liabilities where required or elected in terms of IFRS. The accounting policies and methods of computation are consistent with those used in the corporate financial information for the year ended 31 May 2007. As a result of the group’s restructuring, its comparatives have been restated using predecessor accounting principles. The accounting principles applied result in an extensive restatement of comparatives. It is important to read the financial results as reported in conjunction with the pre-listing statement when assessing these comparatives. Income statement Revenue Revenue increased by R3,65 billion (41%) predominantly due to strong organic growth and the continued escalation in consumer demand for prepaid airtime. The revenue of associate companies does not form part of this revenue as these companies are equity accounted for at net earnings level only. Gross profit The group’s trading environment is characterised by high volumes and relatively low margins. The growth in gross profit percentage margin from 4,78% to 5,34% was congruous with the inclusion of the associated companies that became subsidiaries post listing. Prior to listing and in 2007, the margin contribution formed part of the equity accounted net earnings only. Operating expenses The growth in expenditure of R181 million (78%) incorporates once-off extraneous costs (R89 million) and the expenditure of subsidiaries (R51 million) that were previously associate companies prior to listing. After deduction of the above operating expenses of R269 million, it represented a growth of 17,66% on the previous year, commensurate with the group’s need for additional manpower and variable expenses in support of the substantial growth in group revenue. Earnings before interest, taxation, depreciation and amortisation The growth in EBITDA from R229 million to R328 million (43%) was after writing off the extraneous expenses of R89 million. The growth before the write off of extraneous expenses therefore equated to 82%. Net finance income Finance income The group’s finance income for the year was R193 million earned from the residue of funds raised on listing and the positive accumulative cash generated from trading operations through the majority of the year. Of this amount, R16 million relates to imputed interest receivable on debtors balances in terms of IFRS requirements. Finance expense The group’s finance expense for the year of R148 million included R101 million relating to imputed interest on creditor balances in terms of IFRS requirements. R47 million pertained to historical interest-bearing debt that was expunged on listing. Share of losses from associates A loss amounting to R19,7 million is attributable to Oxigen Services India (Private) Limited (Oxigen). Other associated companies prior to listing generated positive contributions of R2,3 million. Effective tax rate As a result of certain non-deductible expenses, the group’s effective tax rate for the full year was 30%. Dividends As per the group’s previously disclosed dividend policy, BLT will only consider paying a dividend from the financial year commencing 1 June 2010. Segmental pro forma results
Earnings per share The earnings per share at basic, headline, pro forma and core levels exceeded the forecast as contained in the pre-listing statement.
Return on shareholders equity
Balance sheet The group’s strong balance sheet is attributable to good trading results and stringent asset and treasury management. The group is highly liquid and well positioned to support the funding of potential acquisitions without impairing its working capital requirements. Assets Goodwill and intangible assets Investments in associates Financial assets at amortised cost Current ratio Share capital and share premium
Restructuring reserve Transaction with minority reserve As a consequence of the above, goodwill of R899 million, arising from transactions with minorities, is recognised against reserves on the balance sheet as minority shareholders are treated as equity participants. Cash flow statement Cash and cash equivalents increased by R237 million. A summarised reconciliation of this growth is as follows:
The net funds applied to operating activities reflected at year-end was after the application of R277 million increase in net working capital assets on a piecemeal basis over the year in support of the continued growth in group operations. Excess cash flow is utilised on a regular basis for premature settlement of creditors in order to enjoy the benefit of settlement discounts in excess of interest receivable on such funds. The majority of the R405 million pertaining to funds appropriated to investing activities were applied to the acquisition of shares and claims in group companies. Net cash flows from financing activities resulted after applying a portion of the proceeds raised on listing to settle debt and listing costs. Strategic acquisitions post listing
Strategic acquisitions post year-end
Share incentive scheme A staff share incentive scheme has been formulated for presentation and approval at the group’s forthcoming annual general meeting. Directors’ dealings in securities post year-end Further to the disclosures of directors’ interests on page 72, the interests of the directors changed as follows from the end of the financial year to the most recent information available at the date of publishing this report:
Prospects It is not anticipated that Oxigen Services India will become profitable during the next financial year as it continues to invest in the expansion of its transactional footprint. The group is confident that there will be positive growth and profitability across the rest of the group. The consolidation of the group emanating from the acquisition of minority interests and the healthy cash resources on hand have resulted in a solid foundation to support the perpetual expected growth of BLT both organically and acquisitively. Management are constantly evaluating potential acquisitions that will need to meet the criteria of the group’s objectives to expand its footprint both locally and globally in rolling out its bouquet of products and services to additional points of presence. Vertical integration and a positive impact on earnings per share are essential fundamentals to the equation of acquisitions. Appreciation I wish to acknowledge and express my appreciation to the staff of the group, in particular the finance team for their concerted efforts and high-quality performance.
David Rivkind
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